Four reasons why traders should not go short on Nifty50 at current levels

The market might look tempting to go ‘short’ as it has breached crucial support levels, but market participants should not ignore the fact that the index has already plunged 10 per cent from recent high.

NEW DELHI: The Nifty50 has already plunged about 10 per cent from its 52-week high of 8,968 recorded in September, but geopolitical concerns, domestic issues, US presidential elections, uncertainty over Fed rate hike and demonetisation back home are some of the factors that have weighed on market sentiment.

Traders hoping for a V-shaped kind of recovery might be disappointed, as the index is breaching crucial support levels daily. The best option is to sit on the sidelines, but if you are one of those who like to take risks, then don’t go short at least at current levels.

The market might look tempting to go ‘short’ as it has breached crucial support levels, but market participants should not ignore the fact that the index has already plunged 10 per cent from recent highs and more than 11 per cent from its all-time highs.

Going by the buzz on D-Street, ETMarkets.com has collated a list of four factors that traders should keep in mind while trading in the market this week.

Oversold territory: The stock market is down about 10 per cent and key indicators such as RSI or relative strength index is signalling an oversold territory. The reading on the RSI as of Tuesday was 27.48. A reading below 30 is generally considered oversold condition, meaning that a bounceback could be on the cards.

“If one were to consider a very short-term trend, then the broader market is not ready to respect any small bounceback. It has lost all the recovery made last week, which can be more worrisome for a trader,” Chandan Taparia, Derivatives & Technical Analyst - Equity Research at Anand Rathi Financial Services, told ETMarkets.com.

“The Nifty50 has slipped below 100-DMA and 200-DMA and require some stability or bounce as most of the stocks have moved to the oversold territory,” he said.

Bad news in the price: Most of the bad news with respect to Donald Trump winning the US presidential election, rising bond yields and even the domestic issue of demonetisation are already in the price. Long-term investors should use the current fall in the market to get into quality stocks, while traders should remain cautious.

“It is probably too late to ‘sell’ on a fact (demonetisation or likely US rate increase due to Trump winning the election), which everyone is aware off,” Jimeet Modi, CEO, SAMCO Securities, told ETMarkets.com.

“The Nifty50 is down more than 500 points probably discounting the worst scenarios. Therefore, it is now time to be extremely cautious on the short side of the market. Global and domestic cues are all very well discounted in today’s digital world,” he said.

Crucial support at 8K level: The Nifty50 is just about 1 per cent away from its crucial support level placed at 8,000 and investors should wait and watch and don’t go short till the time the index holds above this level. The Nifty50 might move in a range while there will be plenty of action in individual stocks.

“As markets already took a 10 per cent hit from the top of 8,968, at this juncture there may not be fresh shorting opportunity despite breakdown of certain key technical parameters,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in, told ETMarkets.com.

The last leg of the selloff post the market rally following Trump’s victory is completely driven by domestic policy issues, unlike global factors. Hence, there will be a bright chance of sporadic rise if more clarity emerges on this front.

“If the 8,000 level is not broken, then at best the market may get stuck inside a range of a long lower shadow on of weekly charts registered in previous week, whose value is present between 8,002 and 8,296 levels. However, technically a breach of the 8,000 level shall provide fresh shorting opportunity for initial targets of 100 - 150 Nifty points,” Mohammad said.

Wait for a reversal: Traders should wait for a reversal before initiating fresh long positions. At best, the market is poised for sell on rallies going by concentration of Call option at strike prices 8,200 to 8,700. The maximum Call open interest now stands at strike 8,700, down from 9,000 earlier, which is not a good sign for the bulls.

“It is better to go for bottom fishing with hedging as flow and trend has gone into the bear grip. The 7,850 level is a major support zone, which requires the index to hold above the 8,350 level for any early sign of reversal,” Taparia said.